NEW YORK (CNNMoney.com) — The Federal Reserve cut the target on a key short-term interest rate by a half of a percentage point Tuesday to 4.75%, further acknowledgment from the central bank that the mortgage meltdown plaguing Wall Street and Main Street could have a negative impact on the economy.Stocks surged following the announcement with the Dow gaining nearly 200 points, or 1.5 percent. The S&P 500 and Nasdaq also shot up more than 1.5 percent

The cut to the federal funds rate, the first since June 2003, was widely anticipated by investors and followed a surprise cut to the Fed’s discount rate on Aug. 17. The only question was whether the Fed would lower the federal funds rate by 25 basis points or 50 basis points. (There are 100 basis points in a full percentage point.)

The federal funds rate, an overnight lending rate that banks charge each other, is important since it influences the amount of interest consumers must pay for various types of debt, such as credit cards, home equity lines of credit and auto loans. The rate cut should help some beleaguered home borrowers who are set to see monthly payments on adjustable rate mortgages rise later this year.

In its statement, the Fed said that “the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally” and that the rate cut “is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

The Fed also cut its largely symbolic discount rate by a half of a percentage point to 5.25 percent. The central bank lowered the discount rate, which is what banks pay to borrow directly from the Federal Reserve, by 50 basis points on Aug. 17.

Recent Media Excerpts about the Positive Signs in the Real Estate Market:Subprime Reality CheckØThe subprime problem is certainly serious, but it is a short-term problem, mainly involving mortgages originated during 2004-2006 and playing out over the next two years or so.ØThis issue will be mitigated by public and private efforts to help the families in distress. There is no reason for it to spread to the prime market.ØLenders are trying to work out a modified repayment plan if there seems to be a realistic chance that the borrower can catch up. In the FHA’s experience, about half the borrowers in the program do become current within a year. If the lenders and the regulators follow through, they can ease the problem substantially.ØWe have been here before, and not that long ago.Delinquencies and especially foreclosures on prime mortgages remained low during 2000-2002, consistently around 1% for serious delinquencies and 0.2% for foreclosures. The subprime spike had no impact on the prime market then. There is no reason to expect one this time. The delinquency rate has again been stable, so far, while foreclosures have edged up to 0.25% from 0.2%.

ØLoans originated in 2003 and earlier pose no unusual problem.ØHomeowners who are able to make their payments are not going to lose their homes because other homeowners are losing theirs. The roof is not caving in on housing.– “Desperate House Loans? (subscription required)” John Weicher, Wall Street Journal, Aug. 29, 2007.MortgageMortgage rates on 30-year fixed mortgages in the United States fell 4 basis points to 6.08 percent today, according to Bankrate.com’s daily Your Best Interest report. The mortgages in the survey had an average of 0.63 discount and origination points. Bankrate.com, Aug. 29, 2007.
Foreign Investors, Immigrants Boosting the Market“…more and more consumers from around the world are interested in purchasing a home in the United States for themselves, as an investment, or simply to enjoy a piece of the American dream.”– Pat V. Combs, of Grand Rapids, Mich., NAR President and vice president of Coldwell Banker-AJS-Schmidt. “NAR Study Confirms: They Come To America – To Buy Homes“ Iverson Moore, National Association of Realtors, July 30, 2007.ØAmid slow demand from an aging and slow-growing native population, immigrants are fueling predictions of a rebound.ØIn California, nearly one-third of recent homebuyers were foreign-born. For New York, New Jersey and Florida, the figures were between one-quarter and one-fifth. – “Immigrants Lift U.S. Housing Market,” Mark Jewell, Forbes.com, July 30, 2007.Vacation-Home Buyers Going StrongForbes.com, Best Places to Buy a Vacation Home, Aug. 9, 2007: If the sun is shining on the shore, or the powder’s falling on the slopes, vacation-home buyers don’t mind short-term market fluctuations very much. “The main thing motivating a vacation-home buyer is utility. They want to maximize their purchase around a recreational activity,” David Hehman, president of EscapeHomes.com, a San Francisco-based second-home research site. As examples:Northeast: Summer destination Water Mill, N.Y., in Bridgehampton appreciated fastest, with a median home price of $1.38 million, increasing in value at an average of 21% a year over the last five years. Midwest:Victoria, Minn., which is surrounded by many of the state’s trademark lakes, grew an average of 18% a year. South: The north end of Key Largo, Fla., has appreciated at 27% a year, on average, according to NeighborhoodScout, making it the fastest-growing vacation spot in the South. West: Moran, Wyo., situated between Grand Teton and Yellowstone National Parks, has seen 35% average increases in annual value since 2002.
Bright Spots in the Market – “Real Estate Oases”Q. What types of neighborhoods are seeing strong activity? A.Housing analysts say: ØReal estate oases in most major markets whose local economies display moderate to strong fundamentals. ØEstablished neighborhoods convenient to the urban center’s employment and cultural attractions that don’t require residents to make long commutes.ØAbove-median-income areas, often well above, with home prices to match. – “Bright spots in the overall gloomy market,”Kenneth R. Harney, Washington Post Writers Group, Aug. 26, 2007.
Positive News in Your Local Markets:New York, N.Y.A home in Manhattan has never been more expensive than it is today. Condos are selling for an average price of $1.5 million, according to several real estate brokers. Indeed, prices of four-bedroom apartments averaged close to $10 million during the second quarter. “Real Estate Has Never Been Hotter in New York,” Dr. Irwin Kellner, Marketwatch, July 24, 2007.Westchester County, N.Y.Sales volume of single-family homes rose 1.3 percent in the second quarter, compared with last year.That rate of closings, if sustained for the rest of the year, would rank 2007 fifth in total sales volume, after 2005, 2004, 1999 and 1998.At the same time, the average sale price of single-family homes was $965,414, which is 3 percent higher than last year. “Those Horror Stories of Plummeting Home Prices? Not Here.” Elsa Brenner, New York Times, July 29, 2007.Salem, Ore., Pacific NorthwestSleepy towns like Salem, Ore.; Wenatchee, Wash.; and Provo-Orem, Utah may lack glamour but they are among the few places in the country where housing prices are growing at double-digit rates, according to a recent federal study. “Smaller Cities Buck Housing Slump,” Aaron Clark, Associated Press, July 19, 2007.Minneapolis-St. Paul, Minn.The best-selling areas drive home an old real estate theme — that location and price remain the most critical determinants of value.Real estate agents say that with gasoline prices hovering in the $3 a gallon range, more and more buyers have decided they don’t want to spend their money – or time – commuting.

The majority of the quick sales this year have been entry-level houses in the $200,000 to $300,000 range, an indication that there’s still strong demand “Hot Spots in a Cold Market,” By Jim Buchta, Star-Tribune, Aug. 4, 2007.

There is a great new site, www.ShopAndCompareRates.com which will allow Florida homeowners and buyers to find insurance cost comparison information. The site creates a fictional house and then shows how much it would cost to insure, by company and country, based rate filings submitted to the Florida Office of Insurance Regulation.